(Bloomberg) — Federal Reserve officials will continue their decidedly hawkish stance next week, setting the stage for interest rates to reach 5% by March 2023, steps that would trigger a U.S. and global recession, economists polled by Bloomberg said.
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The Federal Open Market Committee will raise rates by 75 basis points for the fourth straight meeting after policymakers announce their decision at 2:00 pm on Wednesday in Washington, according to the poll.
Officials got further reason to stay the course on Friday when US government data showed employment spending rose at a steady pace in the third quarter and the central bank’s preferred inflation gauge was still well above its 2% target.
The poll predicts rates will rise another half point in December, then a quarter point in the next two meetings. Fed forecasts released at the September meeting showed interest rates reaching 4.4% this year and 4.6% next year before cuts in 2024.
Economists see the Fed as determined not to turn too quickly as it battles the highest inflation rate in 40 years. The move to a higher peak rate would reflect rising consumer prices, excluding food and energy, which came in warmer than expected over the past two months. The survey among 40 economists was conducted in October. 21-26.
“Inflationary pressures remain strong and the Fed is set to raise 75 basis points in November,” said James Knightley, chief international economist at ING Groep NV. Given the weakening economic and market backdrop for December,” however, risks tilt toward a fifth 75 basis point hike, he said.
Fed Chairman Jerome Powell has said the central bank is firmly committed to restoring price stability and has repeatedly appealed to his predecessor Paul Volcker, who raised interest rates to unprecedented levels in the early 1980s to fight inflation. Powell warned that the process would be painful, as the goal was to reduce price pressures and engineer below-trend growth as unemployment would eventually rise.
Powell and his colleagues have not given up hope of a soft landing for the economy. But for the first time in polls ahead of the FOMC meeting, a majority — three-quarters — of economists see a recession in the next two years, with most of the rest seeing a hard downturn with a zero cycle. or expect negative growth.
What Bloomberg Economics Says…
“I think the most important thing to watch is how Powell communicates a potential rate cut. He’ll want to avoid giving the impression that a turnaround is imminent, especially not when core inflation is still strong. He would have prepared markets for a 50 basis point hike in December, but which will be accompanied by a dot plot showing a terminal rate of 5%.
— Anna Wong, US Chief Economist
Economists see the Fed as potentially tightening too much: The median economist pegged the peak target rate at 4.75%, and 75% of economists said there was a greater risk of the central bank raising rates too much and causing unnecessary pain. to raise enough and not be able to prevent inflation.
“Monetary policy backlash remains largely underestimated,” said Thomas Kosterg, chief U.S. economist at Pictet Wealth Management. “The full effect of the current tightening may not be felt until mid-2023. By then it may be too late. The risk of policy error is high.”
There could also be an economic bounce to global markets, as two-thirds expect a global recession in the next two years.
While the median of economists was looking for a 50 basis point increase in December, it’s a close call with almost a third pencil at 75 basis point growth.
The path of the exchange rate expected by economists is similar to that predicted by the markets. Investors expect a full 75 basis point hike on Wednesday, lean towards a 50 basis point hike in December and look for peak rates around 4.8%.
If the Fed introduces another 75 basis point move next week, the total increase of 375 basis points since March would represent the sharpest increase in Fed rates since the 1980s, when Volcker was chairman and struggled with high inflation.
“With the Fed facing the choice of doing too much or too little, members will prefer to do too much,” said Joel Naroff, president of Naroff Economics LLC, whose goal is to avoid the inflation facing Volcker. 1970s.
Economists expect the Fed to continue its balance sheet reductions, which began with the second round of securities maturing this June. The Fed reduces its assets by 1.1 trillion dollars a year. Economists project that the balance will reach $8.5 trillion in December 2024, up from $6.7 trillion.
There is a close split on whether the Fed will move to sell mortgage-backed securities as part of tapering, with 57% expecting the move and no consensus on timing.
The FOMC statement is expected to maintain its guidance on interest rates, promising continued hikes, without specifics on the size of the revisions, although a quarter are looking for softer language that hints at smaller hikes.
About a third of economists expect dissatisfaction at the meeting, which will be the third in 2022. Kansas City Fed President Esther George in June favored a smaller hike, warning that too sharp a move in interest rates could undermine the bank’s capacity. To reach the Fed’s planned interest rate path. St. Louis Fed President James Bullard sounded a hawkish dissent in March.
Economists see the Fed eventually changing course in response to low growth and inflation, while slowing rate hikes. Most see a modest first-rate cut in the second half of 2023, with larger cuts in 2024.
(Updates with employment expenditure index and PCE data in the third paragraph.)
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